The Morning Call
8/19/16
The
Market
Technical
The indices
(DJIA 18597, S&P 2187) extended Wednesday’s post FOMC minutes gains though
with only moderate enthusiasm. Volume
continued low but breadth improved slightly.
On the other hand, the VIX fell 6%, finishing below its 100 day moving
average and within a short term downtrend. While that reflects a sizeable drop in
investor fears and is thus a plus for stocks, it is still close to the lower boundary
of its intermediate term trading range (support) which should pose some
challenge to further complacency.
And (short):
The Dow ended
[a] above rising 100 day moving average, now support, [b] above its 200 day
moving average, now support, [c] within a short term uptrend {17627-19363}, [c]
in an intermediate term uptrend {11316-24143} and [d] in a long term uptrend
{5541-19431}.
The S&P finished
[a] above its rising 100 day moving average, now support, [b] above its 200 day
moving average, now support, [c] within a short term uptrend {2067-2306}, [d]
in an intermediate uptrend {1917-2519} and [e] in a long term uptrend {862-2400}.
The long
Treasury rose. While it ended above its
100 day moving average and well within very short term, short term,
intermediate term and long term uptrends, it remained below the lower boundary
of the developing pennant formation. However, it has risen faster than that lower
boundary every day following the break, so I am not sure if there is any
directional information to be had.
On a fundamental
note, you would think that with every central bank in the world reaffirming
their dedication to easy money that bond prices would be making new highs (lower
yields = higher bond prices) along with stocks.
But they are not. Likely this
reflects the weakening dollar which is also a product of easy US money. Of late the weak dollar has caused currency
spreads to widen more than the foreign/US yield spreads (in other words, the
more attractive US Treasury yield is offset by the weakness in the dollar---most
institutional players buy a US bond because of the higher yield but also hedge
the risk of a declining dollar by doing a currency swap. The cost of doing that
swap has risen to the point that the yield advantage of the US bond is being
offset by the higher cost of the currency swap. Hence, fewer foreign buyers;
hence bond prices are not rising), diminishing their investment appeal despite their
higher yield. This is part of the
unusual pin action in the VIX, bonds, gold, currency and oil about which I have
been lamenting.
Speaking of the
dollar, it has been declining over the last three weeks, suggesting that the
currency market knows that either the US economy is weaker than the optimists
believe or that the Fed will remain easy longer or both.
Is the dollar about
to break down? (short):
GLD was up
slightly, ending above its 100 day moving average and within short term and
intermediate term uptrends. It too
should be responding positively to easier money and a declining dollar. But it isn’t---I am still concerned about last
week’s failed second try to surmount a key Fibonacci level and voiding of a
very short term uptrend.
Bottom line: the
Averages responded to a do-nothing Fed policy pretty much as would be expected,
if a little less enthusiastically than I would have supposed. Still there is nothing, technically speaking,
to impede an advance on the upper boundaries of the indices long term uptrends. That said, I have explained above some of the
confusing pin action in the VIX and the bond, gold, oil and currency markets that
seem to be indicating that something is amiss.
Be careful.
Fundamental
Headlines
Yesterday’s
US economic data kept the tone of this week’s stats neutral to positive: weekly
jobless claims fell more than estimates, the July leading economic indicators
were much better than expected and the Philly Fed index was in line. That is enough to put this week’s dataflow in
the plus column.
Overseas,
July UK retail sales were better than expected; July Chinese home prices rose
more than anticipated and July Japanese trade numbers were terrible.
And
just to be sure that there is no one that isn’t confused about Fed policy, yesterday
St. Louis Fed chief Bullard gave a very dovish monetary policy speech while San
Francisco Fed head Williams gave a hawkish speech. This on the heels of the Dudley hawkish
statement on Tuesday and the Fed’s Bugs Bunny FOMC minutes on Wednesday.
The
latest from Bill Gross on QE (medium):
Bottom line: one
day, no one is going to pay any heed to what the Fed says. One day, the economic consequences of QE will
become manifest. It may be tomorrow; it
may be a year from now. But when it
happens, the Market dynamics will almost certainly change. Given that stocks have achieved nosebleed
valuations via Fed bulls**t and free money, it seems likely all that will be
reversed. If I was only smart enough to
know the timing. But alas, I am not; so I
must sit back and enjoy the part of my portfolio that is invested and take some
money off the table when our stocks trade into their Sell Half Range or their
underlying companies’ fundamental decline to the point that they no longer
qualify for inclusion in our Universe.
My thought for
the day: every successful investor that I have ever known focused on
controlling his/her risk and let return take care of itself. I have seen far too many investors who
aspired to success fail because they chased return and paid not enough
attention to risk. The first and last
question that I ask myself in analyzing an investment is ‘what is my downside?’
Investing for Survival
The
benefits of being proficient in mathematics.
News on Stocks in Our Portfolios
Economics
This Week’s Data
The
July leading economic indicators were reported at +0.4% versus expectations of
+0.2%.
Other
Another
stem winder from David Stockman (medium):
The
problems that algo traders are creating in the cattle market (medium):
More
on student loans (short):
Politics
Domestic
Here is a very
good article on why bankers aren’t going to prison for their role in the
financial crisis (medium):
More on what is
wrong with America (short):
And (short):
And as long as
we are at it, how about this (short):
International War Against Radical
Islam
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